Analyzing the Transmission of Monetary Policy and Exchange Rate Shocks on Trade Balance in Asian Economies: A Panel ARDL Approach

Abstract

This study investigates the transmission of monetary policy and exchange rate fluctuations on trade balance dynamics in four major economies Indonesia, India, the United Kingdom, and Russia using a Panel Autoregressive Distributed Lag (Panel ARDL) approach. The analysis covers annual data from 2000 to 2023, focusing on key monetary indicators: money supply (M2), policy interest rates, and real exchange rates, alongside trade balance performance. The results reveal heterogeneous short-run and long-run effects of monetary policy transmission on trade balance across countries. In particular, increases in money supply are found to deteriorate trade balance in the long run for emerging economies, while interest rate hikes tend to appreciate currencies and improve trade performance temporarily. Exchange rate volatility exerts a significant influence on trade outcomes, with stronger effects observed in more open economies like the UK and India. The study provides empirical evidence on how monetary dynamics shape external sector stability and offers critical insights for central banks aiming to enhance policy coordination in an increasingly interconnected global economy.